NJ Pension Crisis Going National

This Monday morning on 'Money for Breakfast' the Fox Business Channel is scheduled to look at the New Jersey state pension plan's acquisition of $180 million in stock in troubled Lehman Brothers. At the time I noted that the plan was in a catch 22. "To justify the absurd 8.25% earnings assumption they have to take these imprudent risks with money that needs to be liquid. Stop the insanity. This is retirement money. It should not be gambled with." I followed up with a blog entry which I intend to recount on that program.

In preparation I spent the day poring over the latest actuarial reports as of July 1, 2007 and compared them to similar figures from July 1, 2002. Though asset values were stagnant, in the $80 billion range, as Governor Corzine in his toll-tour power point presentation (page 20 or 23) showed us, the plan liabilities were anything but stagnant.

After totaling pertinent numbers from these reports and comparing 2007 to 2002 we see that there were 236,541 retirees (up from 193,069) getting annual payouts of $5.78 billion (up from $3.71 billion) which were valued at $60.2 billion (up from $38.6 billion). Had these been the only liabities then the plan would be in fine shape. Since I contend that the actuarial assumptions are too rosy and we are dealing with a population that can be expected to live longer than most because of lifetime health care coverage, valuing current liabilities at $80 billion would be closer to reality. But $80 billion is what the plan has and we still have all those non-retirees.

Comparing 2007 to 2002 we see that there were an additional 525,306 current employees and vested terminees (up from 448,962) with benefits valued at $56.7 billion (up from $43.7 billion). If you accept my actuarial assumptions this entire liability is unfunded. There is nothing set aside for all those state workers, most of whom are having from 3% to 8.5% of their salaries taken out of their paychecks and deposited into this plan.

The idea behind pension funding is that money is deposited during a participant's working lifetime so that at retirement there will be enough to pay them the annity promised. In New Jersey's plan if annuities were purchased for all current retirees and participant contributions were returned (with 2% interest as legislated) to all other participants, it would certainly take all of the trust's assets. That is, if it were done today. Assuming a 9% increase in annual payouts over the next ten years there would be $94 billion paid out over that time. Since the state is balking at billing taxpayers it is left to trust earnings to keep up. If Lehman Brothers-type investment risks work out, bankruptcy may be put off. But it's a long shot and not what pension funding is about or what retirement security should depend upon.